California Real Estate and the Neurosurgeon


What does California real estate have to do with neurosurgery? If you are thinking about investing in California real estate, you need to have your head examined.

Before I start ranting, I would like to disclose that I have no political affiliation whatsoever.


March 2012, two Stanford professors (Boskin and Cogan) wrote an excellent op-ed in the Wall Street Street entitled "
California's Greek Tragedy". It is short, to the point, and well worth the few minutes to read it. The elections are over. California has made a commitment to exactly the reverse direction that the professors had hoped for.


Starting with Proposition 30, the sales tax increase and the income tax increase for the top 1%, the California version of the fiscal cliff has been averted for now, with $6 billion in estimated increases in revenue. Here is the
State Budget.  There is nothing but patchwork and political jargon in there, claiming among other things that


"……the Budget will be balanced in an ongoing manner. This represents the first time in over a decade that future spending is expected to stay within available revenues."

 

I have no reasons to believe that as we approach the end of the financial year next spring, California won't be running out of money once again.

As per Proposition 30:


"…..These new tax rates would affect about 1 percent of California PIT filers. (These taxpayers currently pay about 40 percent of state personal income taxes.)"

 

There are about 16.5 million tax returns for California according to the IRS, so 1% is only 165,000. I wonder if a few hundred of these 1%ers were to decide they have had enough and leave, taking whatever business they have with them, would it negate every extra dime in revenue that Proposition 30 was hoping to achieve? Furthermore, I wonder how many households with greater than $500k taxable income would choose to move to California?

After the elections, California not only has a Democrat as Governor, we have a super majority of Democrats in both the State Senate and Assembly. This is the unadulterated tax and spend party, supported strongly by the give-me-more unions. They have just raised the sales tax and income taxes for the rich, so where else can new revenue come from?

The answer: REAL ESTATE. Proposition 13 from the 1970's allowed Californians to cap the property tax. That is now an easy target, especially for commercial properties. 1031 Tax Deferred Exchanges would most likely be high on the list, especially for out of State exchanges. I don't wish to debate the merits of Proposition 13 here, but any repeal, or just talk of a repeal, will be detrimental to California real estate. While businesses that are not State dependent may procrastinate and many more may move out, new businesses certainly have no reason move in.

More unpredictable is the new round of rules and regulations that California is famous for. Pertaining to real estate, my biggest fear would be increased "tenant rights", rent control or other creative restrictions. What if I purchased a property with a reasonable vacancy allowance and the law changed, lengthening the eviction process. It would blow my profit/loss projections then and there. The same would apply to any businesses that are in the State today. Who in their right mind would think about relocating their business to California if one doesn't know what the legislature may be plotting? The direct impact to California real estate is through employment growth. No jobs, no housing.

Then there is the demographic squeeze. California has always had a much lower home ownership rate than the nation's average and it may go lower. First Tuesday, a California Real Estate Journal, recently published an article entitled "Will first-time homebuyers save California’s homeownership rate?"

First time buyers are not going to support California real estate for the indefinite future. Fat cats looking to retire in coastal California may question why they would want to move here and pay the extra taxes. Middle class retirees who can only afford the Inland Empire or Central Valley can find equally miserable locations to move to, such as Phoenix, only they're cheaper.

The consensus is quite contrary to my views. In Silicon Valley, real estate is on fire, fueled by Facebook, Apple and Google bucks.  Many markets are reporting growth in sales, median prices and a lack of inventory. I believe it is all noise and very temporary. To illustrate this, take a look at the most recent data for September, as reported by DQNews. DQ utilizes unmolested recorded data and is extremely accurate.

In Southern California, investors purchased 27.3% of all closings. 25.2% utilized FHA financing while 31.5% paid cash. Does that make sense? Why would anyone pay cash when the Fed Chairman is begging everyone to borrow at ridiculously low rates? (September was before QE3, but rates were not much different). For the Phoenix area (Maricopa-Pinal Counties), investors purchased 38.6% of the closings. 24.7% utilized FHA financing while 39.6% paid cash. For Las Vegas, a whopping 48.5% was purchased by investors. 35.2% utilized FHA financing while a mind-boggling 52.4% paid cash. I am using Phoenix and Vegas because they are typically overflows of investors from or in California.

This is nuts.  All these investors and cash buyers may be happy with a low yield today, as anything seems better than the miniscule return from other fixed rate instruments. Have they considered that they have an embedded loss? What if rates normalize or possibly go parabolic? Can you imagine what is going to happen to the less than 4% cap rate rental if the 10 year treasury note yield is 4%? (As recently as 2007, before the 'QE' exercises, the 10 year treasury yield was over 5%.)

In summary, California is entering a phase where demographics are most unfavorable. The political environment is even more business unfriendly than it was previously. Chairman Mao and Comrade Stalin showed the world that it is evil to be a landlord. California may be taking a chapter from their manifestos. Having enjoyed the fruits of California real estate ownership since 1975, I have never seen such uncertainty as we face today. Current prices, in my opinion, are not remotely low enough to offset the risk.

 


 

Get thee hence, evil landlord!

(Photo via Wikimedia Commons)

 


 
 

Emigrate While You Can... Learn More

 
 

 

Dear Readers! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

One Response to “California Real Estate and the Neurosurgeon”

  • Floyd:

    The future will tell who had the upper hand: those converting cash into RE, or those holding on to their cash waiting for better valuations.

    Given how much cash is despised, it may be the time to hold on to it…
    But, boy, this is frightening with all the ZIRP and QE around…

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • LA5H5981sc
President George W. Bush presents the Presidential Medal of Freedom to Federal Reserve Chairman Alan Greenspan, one of 14 recipients of the 2005 Presidential Medal of Freedom, awarded Wednesday, Nov. 9, 2005 in the East Room of the Whiite House.  White House photo by Shealah CraigheadAlan “Bubbles” Greenspan Returns to Gold
      Faking It   Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. […] The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. — Alan Greenspan, 1961   He was in it for the power and the glory... Alan Greenspan gets presidential bling...
  • Slider-gold-img-1The Gold Situation
      A Growing Bullish Chorus – With Somewhat Muted Enthusiasm A few days ago a well-known mainstream investment house (which shall remain nameless) informed the world that it now expects the gold price to reach “$1,500 by early 2017”. Our first thought was: “Now they tell us!”. You won't be surprised to learn that the same house not too long ago had its eyes firmly fixed in the opposite direction.   Da bling be goin' somewhere, fellow rastas and homies! Photo via...
  • William SimonEnd of an Era: The Rise and Fall of the Petrodollar System
      The Transition   “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul   A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
  • Ulpian (1)European Banks and Europe's Never-Ending Crisis
      Landfall of a “Told You So” Moment... Late last year and early this year, we wrote extensively about the problems we thought were coming down the pike for European banks. Very little attention was paid to the topic at the time, but we felt it was a typical example of a “gray swan” - a problem everybody knows about on some level, but naively thinks won't erupt if only it is studiously ignored. This actually worked for a while, but as Clouseau would say: “Not...
  • Vote Early Zombie at Sharpstown High SchoolWriting on the Wall
      Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so.   It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh   We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
  • croesus_av_stater_1Gold – Eerie Pattern Repetition Revisited
      Gold Continues to Mimic the 1970s Ask and ye shall receive... we promised we would update the comparison chart we last showed in late November in an article that kind of insinuated that it might be a good time to buy gold and gold stocks (see: “Gold and Gold Stocks – It Gets Even More Interesting” for the details). We are hereby delivering on that promise.   A Lydian gold stater from the time of the famously rich King Croesus, approx. 570 BC. It seems they already had this...
  • London-City-Scene lo rezFat People for Trump!
      Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot.   The protest vote attractor with the funny hair. Image credit: Liberty Maniacs   Trigger warning: In the following ramble, we make fun of...
  • tokyo whaleDestination Mars
      Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks.  If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical.  But, in certain economies, this is now standard operating procedure.   The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
  • Toscana_Siena3_tango7174The Central Planning Virus Mutates
      Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination.   A...
  • The-Deep-State-Mike-LofgrenAmerica Has Become a “Parasitocracy”
      Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to.   Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
  • TrumpoYellPlanet Debt
      Low Interest Rate Persons   She is a low-interest-rate person. She has always been a low-interest-rate person. And I must be honest. I am a low-interest-rate person. If we raise interest rates, and if the dollar starts getting too strong, we’re going to have some very major problems. — Donald Trump   Two low interest rate persons! The Trumpsumptive president (Donald the Tremendous) can be seen here indicating the approximate size of the interest rate that will...
  • bristlecone-1000x672Long Term Market Perspectives
      Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world.   Ye olde bristlecone Photo credit: Kosta Konstantinidis   You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com